Deflation Dementia

by: Tim Iacono November 25, 2008    

Tim Iacono

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Saner heads are definitely not prevailing in the increasingly dark and damp discussion of one of the hottest economic topics of the day - deflation.

In fact, a sort of dementia now seems to be manifesting itself in some of those individuals who utter the word "deflation" - a condition where the utterers undergo changes in their brain function, sometimes becoming disoriented about time and people, oftentimes believing they have been transported back to an era of sound money when deflation really mattered.

Nowhere was this dementia more noticeable than with Senator Dick Chuck Schumer (D-New York) when he appeared on ABC's This Week on Sunday.

The following comments were made when discussing the danger of providing too small of an economic stimulus package with deflation already at our doorstep:

I believe we need a pretty big package here. First I think that Congress will work with the President-Elect starting now and we'll have a major stimulus package on his desk by inauguration day. I think it has to be deep. In my view it has to be between $500 and $700-billion dollars and that's because our economy's in serious, serious trouble. You look at unemployment, you look at consumer confidence, you look at the stock market.

We're on the edge of deflation. Once you get into deflation you almost never get out of it. That's what the Great Depression taught us, that's what Japan taught us.

So a strong shot in the arm, just the way Barrack Obama has conceived it - infrastructure, green jobs is what is needed and most economists say, to make this work, you need about five percent of GDP which would be $700 billion. It's a little like having a new New Deal, but you do it before the Depression, not after.

The dementia was plain to see as Schumer delivered these lines, moving one flat, extended hand horizontally in front of the camera to depict being on the "edge" of deflation, then making sharp downward movements with that hand to demonstrate "getting into" deflation.

The screenshots below from the video at ABC demonstrate this sequence.

First, on the "edge" of deflation...
And then falling "into deflation", a development that would apparently be so painful that the Senator had to close his eyes and grimace just to get through it.
He may have mumbled something about Irving Fisher as well, but it was too faint to be accurately transcribed.

The dementia has apparently spread to the U.K. as well, this item from the Times Online showing how a seller of "with-profit" bonds has somehow been transformed into some sort of a cartoon character as a result of deflation.

Someone should probably crank up the microfiche machine to see if there were any similar occurrences of deflation dementia back in the 1930s.

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This article has 16 comments:

  •  
    Nov 25 07:59 AM
    Silly me, I thought this site was about business and economics, not politics.
    Reply | Link to Comment
  •  
    Nov 25 08:57 AM
    In these modern times, we measure economic states in hours, not years. Producers have stock to dispose of, so they lower prices. In fact, it is energy that took the hit, and energy does not count, or does it, or did energy return to normal after the speculators left or did demand drop by two thirds, I can not remember.

    Do we have deflation or the paradox of durable goods. When a durable good becomes less desirable, the available supply increases for a while putting pressure on the selling price. But now the durable good has also to compete with the second hand market of undesirable durable goods which puts further pressure on the selling price, as in housing. Will we see videos of new trucks being crushed? Will GM offer attractive trade-in values so they can remove the second hand vehicles from the market? Why are they building new houses or why are they building the same houses? Chrysler rebounded because they built a different vehicle, the minivan.

    Where is all the electricity going to come from to power electric cars when we already have brown-outs? How much will it cost? Is this another ethanol solution?
    Reply | Link to Comment
  •  
    Nov 25 09:34 AM
    Deflation? Inflation? Who can tell and who's numbers do we use? Are we using pre clinton or post clinton formulas? How about stagflation? Once the housing market drops back to a normal price index do all thoe upside down mortgage owners punt? If so does the economic down turn get worse or better? This is not a normal rational economy. Go long on cash and wait out the crash.
    Reply | Link to Comment
  •  
    Nov 25 09:46 AM
    It would be more helpful to write about ideas than people's hand gestures.......and to make proposals than to call names (like demented).
    Reply | Link to Comment
  •  
    Nov 25 09:48 AM
    The problem is not deflation per se, but a deflationary spiral that feeds on itself to reduce economic activity to a very low level. That is what happened to Japan in the 1990's and to the U.S. (and Europe to a lesser extent) in the early 1930's. Government action can not prevent deflation but can slow and hopefully stop the spiral. The big danger with large stimulus is on the other side. If too much money is dropped from the helicopter, it exceeds the amount needed to stop the spiral down and can crush the people beneath the drop with very high inflation.

    As I have said before, the balance point between not enough stimulus (and resulting deflationary spiral) and too much stimulus (inflationary surge) is more like a knife edge than a balance beam. It is certainly not a broad plateau. The question: Can we possibly stay on the knife edge without falling to one side or the other?

    An aside to Ransome: One of the stimulus efforts Obama has proposed is investment in new energy technologies and an improved electrical grid. This could be a benefit to the economic future what ever the outcome with the knife edge balance. By the way, your comment on the recovery of Chrysler in the 1980's (via the minivan) is most apropos for the current outlook for the automotive industry. Those auto makers that survive will need to outperform those that fail in the new product arena. In my opinion, tweeking the old product will not be successful. Although some old product may survive for years to come, it will not be the engine (pardon the pun) that drives future success.
    Reply | Link to Comment
  •  
    Nov 25 09:50 AM
    That Washington would realize trillions of dollars are needed for stabalizing this economic collapse and reinvest into innovation and other upward mobility projects is promising and something I expected.

    Yes, the Democrats are going to create the jobs, higher ed training and help Americans restructure loans. That is two parts of it. The other necessary part is cutting unecessary spending to the bone. That has me real concerned.

    Fiscal prudence is not something the Democrats or Republicans for that matter seem to understand yet at this point. A very big problem is STILL leadership. The Obama economic council is made up of people that had everything going for them in the mid to late 90's. There are some bright stars but established paradigms that have suddenly shifted requires fundamentalists willing to dig into the numbers and collect massive amounts of research and streamline the conclusions in short order. Besides the change in Administration, the House of Representatives that is economically clueless and riddled with the corrupt are still leading the show.
    Reply | Link to Comment
  •  
    Nov 25 11:02 AM
    One of the biggest dangers of socialism is the belief it carries with it that human beings are, for the most part, in control of their economic destinies. While the Democrats (and lately Republicans) are not truly socialist, sometimes their attitudes reflect this belief.

    Schumer: "So a strong shot in the arm, just the way Barrack Obama has conceived it - infrastructure, green jobs is what is needed and most economists say, to make this work ..."

    Free market economics carries another dangerous belief which is related to various religious beliefs which, in essence, teach that God is in control and everything that happens "happens for the best in this best of all possible worlds." Therefore, free market economics teaches that it is not wise for human beings to do anything except trust in the invisible "hand" of God and the laws of nature, economics, etc.

    Neither is true, of course. There is no benevolent "hand" guiding human affairs and we human beings are not capable of creating utopia on earth all by ourselves. Economic wisdom consists of striking a middle path between government "bailouts" and letting market forces punish "offenders."

    Runaway deflation and inflation are caused by obscure forces which are only partially understandable and controllable, just as wars, famines and plagues are.

    We can only attempt to understand and then prevent the worst effects of these human catastrophes by admitting the limitations of our economic understanding and capacities and acting with some moderation and humility along with some intelligence, audacity and creativity.

    Whatever the case, both moderate inflation and deflation are not harmful in themselves but clearly one or the other is practically inevitable in the absence of complete price stability which is impossible.

    But then again, occasional, temporary, individual and group insanity is probably inevitable. As individuals we can try to protect ourselves from temporary insanity but there isn't much we can do about other people and groups as the period leading up to World War II, and many other historical examples, teach us.
    Reply | Link to Comment
  •  
    Nov 25 12:14 PM
    How come the comments to the articles on this site are almost always more intelligent than the articles? Do people pay to post articles here or something?
    Reply | Link to Comment
  •  
    Nov 25 12:56 PM
    Ah, what the hell? Let's get real, and admit there is absolutely NOTHING that can be done to avoid the LOOOOOONG recession that has already started. Most U.S. citizens are badly overextended financially, and it takes a long time to come back from that. Get used to eliminating all those luxuries from your life. You danced, and the piper wants his pay, now.
    Reply | Link to Comment
  •  
    Nov 25 01:10 PM
    Oddly, the engine that drove the Chrysler minivan to success was Japanese.
    Reply | Link to Comment
  •  
    Nov 25 02:12 PM
    Please don't criticize the author when you completely fail to grasp the point of the article. The point is not about politics or hand gestures, it is about the absurdity of talking seriously about 1930s style deflation in today's system of pure fiat money where there are obviously no lengths to which governments will go to try to clean up after the bursting of the most recent asset bubble. I can see how some might take this out of context - instead of just spouting off, why not look for context next time.
    Reply | Link to Comment
  •  
    Nov 25 03:43 PM
    Umm, Carey Jim: The "invisible hand" that is talked about in Economics has nothing to do with a belief in God. It is a term used to describe the various market forces at work. I've not read any Economist (or Minister) claiming that we should just sit around and wait for God to sort everything out. We all have a responsibility for our own actions, thoughts, beliefs and reasoning.

    However, God is in complete control of what happens and promises to provide for those who accept Jesus Christ as their savior and Lord. So you are 100% incorrect in stating that God does not direct the affairs of men.

    But, these facts are found in the Bible and not in any "free market" textbook. I think that you are attempting to argue against a point that has not been made, because you do not have an answer for the mess that we currently find ourselves in. I really didn't expect to find someone using their atheistic beliefs to push their economic views (even though you really never stated your views, or a possible solution).
    Reply | Link to Comment
  •  
    Nov 25 05:19 PM
    Tim - - -

    Perhaps I should have worded my comment more carefully. I did not intend to denigrate your opinion, but to add my perspective. I always find your posts interesting, even though I may have my own two cents to put in.


    On Nov 25 02:12 PM Tim Iacono wrote:

    > Please don't criticize the author when you completely fail to grasp
    > the point of the article. The point is not about politics or hand
    > gestures, it is about the absurdity of talking seriously about 1930s
    > style deflation in today's system of pure fiat money where there
    > are obviously no lengths to which governments will go to try to clean
    > up after the bursting of the most recent asset bubble. I can see
    > how some might take this out of context - instead of just spouting
    > off, why not look for context next time.
    Reply | Link to Comment
  •  
    Nov 25 05:22 PM
    Ransome - - -

    Good point about the Chrysler minivan engine. Sometimes world trade does have a hand in saving U.S. jobs and industries.
    Reply | Link to Comment
  •  
    Nov 25 10:35 PM
    The gold standard isn't around anymore so the government can always stop deflation. Just print money and pay off gov bonds or spend on infrastructure. If the government doesn't print too much money, deflation will end and there won't be a lot of inflation either, (maybe, if there isn't a shortage of anything and we are not too far in debt already) Okay, maybe there will be lots of inflation, but there won't be deflation.
    Reply | Link to Comment
  •  
    Nov 26 12:21 AM
    Fix the US job market and the financial markets will recover on their own.

    Start by doing away with "Free Trade" and replacing it with "Fair Trade." That is, if a country doesn't have to pay its workers an equivalent to the US minimum wage, add a tariff on its imports. If a country doesn't have to comply with similar environmental regulations as US manufactures do, add a tariff to their imports, if a country uses child labor or slave labor, block their imports all together, if a country manipulates currency exchange rates, impose an equalizing tariff, etc, etc. Fair trade as opposed to free trade would substantially correct our trade deficit and bring a significant number of manufacturing jobs back to the US.

    Next, deport ALL illegal's ASAP to create job openings and drive up wages for legal US citizens. Additionally, for the US to be an economic super power again, we have to a country where our natural resources substantially exceed our domestic requirements. To achieve this, we must achieve population stabilization which will never happen with tens of millions of non birth control practicing Mexicans invading our borders and our jobs.

    Next, pass a law banning the off shore out sourcing of personal identifying information which in turn would force thousands of decent call center jobs to return to the U.S.

    Pass a law that any company that out sources internal or external vendor jobs off shore must pay double or even triple unemployment insurance rates.

    Next, pass law that requires country of origin labels on ever single product on U.S. store shelves.

    Next, pass a law requiring every single shipping container coming into a U.S. port be inspected by a U.S. customs employee (at the expense of the shipper) would in turn require thousands of new customs inspection jobs. In addition to increasing our national security, inspecting all these containers would prevent billions of dollars in pirated counterfeit goods from entering our country.

    Next, pass law making it illegal for a store clerk or cashier to sell toxic products. This way, when a Walmart cashier sells a lead paint tainted toy made in China, the cashier and Walmart store manager gets arrested and goes to jail. In no time at all, Walmart will find it more practical to just buy its products from reliable, trustworthy American suppliers as opposed to the lying, corrupt, organ harvesting, currency manipulating chinese.

    Next, the U.S. govt should build the border fence (full border not the partial fence) and finance it with $1000 fines levied against each of the 20 million+ illegal's being deported. (If they don't cough up they fine, they get sent to prison for a year where they can work off their fine making car tags).

    To fill the employment vacuum caused by the mass deportation of the 20 million+ illegal's in the US, pass a law prohibiting welfare or section rental payments to anyone without a significant and verifiable disability which will in turn drive these welfare leaches to seek work and replace the illegal's we now see in every car wash, fast food joint, every hotel, every construction site, etc.

    Next, the Secret Service, IRS, and FBI should all hire thousands of more investigators to go after all those who have committed mortgage or any other form of fraud against a financial institution, and go after the hundreds of thousands of immigrants (legal and illegal) who chose to work off the books in a tax free underground economy like they do in their home countries. The fines levied and back taxes collected against these restaurant owners, dry cleaners, gas station owners, finger nail parlors, liquor store owners, convenience store owners, cab drivers, etc would more than offset the cost of the agents who finally get these immigrant tax cheats to comply with our nation's tax laws.

    None of the above would cost any money net, as a matter of fact, the above would actually decrease expenses and increase revenues with the import tariffs and fines described.

    What are we waiting for? let's do it!
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